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Jerry Reiss ASA**

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By Jerry Reiss


Family Law attorneys are making huge mistakes dividing non-deferred Compensation programs as deferred compensation programs, thereby employing circular reasoning and committing malpractice. What is Deferred Compensation and why mislabeling it cause such concern is the focus of this short newsletter?

Deferred Compensation, generally refers to deferring taxation on earnings.  As something may be earned in the first place, it becomes an acquired asset with the normal presumption attached that it was
acquired during the marriage.  Deferred Compensation is normally associated with Retirement and Welfare Benefits but it can also include non-qualified stock and stock options.  The confusion begins with retirement plans because, to qualify as a retirement plan the benefit must vest upon satisfying the conditions for retirement, and all retirement plans must contain a definition of what is earned, when it was earned, how it is earned, and that what is earned can never be reduced.  While normally the last requirement is restricted to qualified plans, here in Florida State statute prevents cutback of earned retirement benefits.  Branca v. City of Miramar, 634 So. 2d 604, 607  (Fla. 1994) citing 4th DCA Branca, 602 So.2d at 1378 (Farmer J., dissenting).  None of these attributes apply to Welfare Benefits or other deferred compensation benefits programs.  Anderson v. Morrell, 830 F.2d 872, 876 (8th Cir. 1987) citing Winer v. Edison Bros. Stores Pension Plan, 593 F.2d 307, 310 (8th Cir. 1979).  "Employee Welfare Benefit Plans were expressly excluded from these sections ..." Anderson v. Morrell at 876 citing Blau v. Del Monte Corp., 748 F.2d 1348, 1352 (9th Cor. 1984).  To be clear, only retirement benefits contain earnings definitions, and only these benefits must be paid.  This is why determining what's marital property with all other deferred compensation programs requires detailed analysis working the terms of the benefit to determine what was earned and when it was earned. Jensen v. Jensen, 824 So.2d 315, 317-320 (Fla. 1st DCA  2002)

Retirement Benefits include defined benefit plans and defined contribution plans.  Defined benefit plans include traditional monthly benefit plans, floor and floor offset plans and cash balance plans.  Defined Contribution plans include Profit Sharing and Defined Contribution Pension Plans.  Profit Sharing plans include discretionary contribution plans with or without corporate profit, 401(k) plans, or its government equivalent, 457 Plans,  ESOPs, and Thrift Plans.  Defined Contribution Pension Plans include money purchase pension plans or its government equivalent, 403(b), and target benefit plans.  There are other plans that are hybrids of one or more general classifications.  All of these plans have earnings and vesting definitions, must vest upon attaining the conditions for retirement, must vest upon plan termination, and what was earned can never be reduced.

Welfare Benefit Plans need not ever vest (and seldom do) and do not contain earnings definitions.   These plans are generally insurance type plans, like Health and Disability Insurance Plans and Life Insurance.  Benefit rights flow from events randomly occurring in nature like, accident, illness or death.  For that reason prepaid legal service is a welfare benefit.  Coverage can be withdrawn based on the contract and the contract alone and all rights terminate except those establishing benefits based on these random event occurring while the contract was in force.  The only marital property associated with these benefits are cash value rights created during the marriage or in some cases payments made during the marriage.  Weisfeld v. Weisfeld,  513 So.2d 1278, 1281 (Fla. 1989) citing Goode, 692 S.W. 2d at 757; In Re: the Marriage of Burt, 494 N.E. 2d at 868; Lukas, 404 N.E. 2d at 505; Johnson, 838 S.W. 2d 703; Quiggins v. Quiggins, 637 S.W. 2d 666; 668-69 (Ky 1982); Platek, 454 A.2d at 1059; Orszula, 356 S.E.2d at 114; see Queen, 521 A.2d at 324. 

Other deferred compensation programs need never vest because they are often unfunded and seek to reward employees for future services that may or may not be paid.  Because Welfare and non-retirement deferred distribution benefits may not be paid, may never vest, and often don't have clear definitions of what was earned, when it may be earned, vesting may substitute for what was earned except when it can be shown by the way the benefit works that vesting involves tangential effort.  Tangential effort can involve great effort but be passive because the effort did not result in earning the asset or the growth.  Thus, this entails a thorough understanding of the four types of effort recognized under Florida Law:  Passive (little or no effort), Tangential, Active (significant effort, yet passive), and a Foundation of Active Efforts during various measurement periods.    

But not all compensation paid in the future fits into F.S. 61.075(6)a.1d.  If an asset has yet to be created, it may not create marital property even though it may create property in the future.  A clear example of that is when a right to the property is created after the cutoff date, such as the adoption of a 61.075(6)a.1d program developed after the cutoff date which awards benefits or compensation after the cutoff date, but may give earning credit during the marriage.   When deferred compensation is used loosely where nothing has been acquired, simply categorizing it as deferred confuses whether the asset was acquired.  In the instance of deferred compensation programs, a contract or plan was acquired before the cutoff date, and whether something was earned and how much may befall on the person who participates in the contract or program to demonstrate a non-marital portion because then at least a future right was acquired during the marriage.  But when it is not a F.S. 61.075(6)a.1d asset, it must be scrutinized to understand the compensation purpose.  If for example it is compensation rewarded if an injury occurs after the cutoff date, it is not marital property. Such might be triggered by an executive agreement delineating what occurs on firing or constructive firing pursuant to a merger/acquisition.  But that same merger/acquisition may vest a right to a stock option, and there it is 100% marital property, not based on the actual merger/acquisition but because vesting it upon said occurrence makes the company so much less saleable demonstrating vesting is a golden handcuff because its vesting works against the company's interest, speaks volumes that the award was fully earned when granted. If it's based on disability, it's a 61.075(6)a.1d asset excluding income after the cutoff date.  See Weisfeld.

But many compensation programs may be designed as signing bonuses (as is often accomplished with forgivable loans), which could create marital property or be created when conditioned are met because the purpose of many such programs is to sell a book of business at retirement.  Then, the property right has not been created, and when it is created, that book of business involves personal goodwill, and not marital property (See Thompson v. Thompson, 576 So.2d 267, 270 (Fla. 1991) citing Taylor v. Taylor, 386 N.W. 2d 851, 858 (Neb. 1986)) the existence of which is revealed by non-compete clauses extending into retirement.  Held v. Held, 912 So. 2d 637, 640 (Fla. 4th DCA 2005) citing Williams v. Williams, 667 So.2d 915, 916 (Fla. 2nd DCA 1996).  When the purpose is to buy a
book of business at retirement it can involve two separate compensation programs because what that business is worth is determined by two things:  1) The general revenues produced at the moment of transfer, and the persistency of what clients remain, which will require working those clients after the transfer takes place.  That is why it can involve multiple programs coordinating with one another and different non-compete clauses with each of the coordinating programs.

Over the last four years about half of my testimony deals with these complex financial instruments and at least a third deals with post judgment contract disputes.  In April of this year my testimony was favored over a national consulting actuarial firm dealing with a benefit rights dispute applying to a class of employees.  My testimony has been favored in every single trial this year and this has been a very active year for trials.  

* D/b/a Jerry Reiss, ASA.  Enrolled Actuary Member of the American Statistical Association.  Listed in Best Experts in America:  Family Law 2007-2012; Employment Law 2006-2012.

Jerry Reiss, All Rights Reserved

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